2017 (6) TMI 398 - AT - Income Tax

Disallowance of deduction claimed under section 80IC - allocation/apportionment of expenses relating to auditors remuneration and directors remuneration to the eligible unit thereby reducing its eligible profits to that extent - Held that - We find the contention of the assessee that the manufacturing operation involved in the eligible unit did not require too much time and effort of the directors since the parts sold involved minimal variations and sale was made to a single party, also merits no consideration since the directors are not necessarily required to be involved in the day-to-day operations but have to be involved in strategic decision making, which at no stage, has been denied by the Ld. counsel for the assessee. Therefore we have no hesitation in rejecting the argument of the assessee that no portion of directors remuneration was required to be apportioned to the eligible unit at Pant Nagar. It is undisputed that the remuneration paid in the preceding year amounting to ₹ 20.25 lacs, when the eligible unit of the assessee was not functioning, was to be attributed entirely to the non eligible unit at Ludhiana. It is only increase in the remuneration in the impugned year vis- -vis that in the preceding year, which can be apportioned between the two units. The same amounting to ₹ 9.75 lacs, apportionment of ₹ 6.94 lacs to the eligible unit in Pant Nagar is unjustified considering the fact that while apportioning the increase in remuneration, efforts of the directors of the company in increasing turn over of the non eligible unit should be taken into consideration and also to the contribution of the new director appointed in the company to the activities of the non eligible unit. Considering the same, we are of the view that apportionment of directors remuneration to the extent of ₹ 3 lacs to the eligible unit is just and reasonable, considering the fact that considerable amount of efforts must have been given by the directors for setting up of the new unit in Pant Nagar. We uphold the apportionment to the eligible unit, of auditors remuneration to the extent of ₹ 59,800/- and the directors remuneration to the extent of ₹ 3 lacs. The disallowance of deduction claimed u/s 80IC by the eligible unit to the said extent of ₹ 3,59,800/- is, as a consequence, also upheld. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Apportionment of Auditors Remuneration to the eligible unit under section 80IC.
2. Apportionment of Directors Remuneration to the eligible unit under section 80IC.
3. Basis of allocation of expenses between units.

Detailed Analysis:

Issue 1: Apportionment of Auditors Remuneration to the eligible unit under section 80IC
The assessee had two units, one in Ludhiana and another in Pant Nagar, Uttarakhand, with the latter eligible for deduction under section 80IC of the Income Tax Act. The Assessing Officer (AO) noticed that the assessee had claimed auditors remuneration solely for the Ludhiana unit. The AO apportioned ?59,800 of the auditors remuneration to the Pant Nagar unit, reducing its profits and the corresponding section 80IC deduction. The CIT (Appeals) upheld this apportionment, noting the increased duties of auditors for the newly set-up Pant Nagar unit. The assessee did not challenge this apportionment before the Tribunal, and thus, it was upheld.

Issue 2: Apportionment of Directors Remuneration to the eligible unit under section 80IC
The AO also apportioned ?6,93,424 of directors remuneration to the Pant Nagar unit, which the CIT (Appeals) upheld. The assessee contended that separate books were maintained for both units, with no inter-unit transactions, and that the directors' remuneration increase was due to the induction of a new director who had no responsibilities towards the Pant Nagar unit. The CIT (Appeals) found no evidence supporting the claim that directors had no duties vis-à-vis the exempt unit and upheld the AO's apportionment based on turnover. The Tribunal agreed with the CIT (Appeals), stating that directors are responsible for the entire company's profitability, including strategic decisions for the Pant Nagar unit. Therefore, the argument that no portion of directors remuneration should be apportioned to the eligible unit was rejected.

Issue 3: Basis of allocation of expenses between units
The assessee challenged the turnover-based allocation of directors remuneration, arguing that only the increase in remuneration from the previous year should be apportioned since the eligible unit was not operational in the preceding year. The Tribunal agreed with this contention, noting that the increase in directors remuneration was ?9.75 lacs, and apportioning ?6.93 lacs to the eligible unit was unjustified. The Tribunal deemed it reasonable to apportion ?3 lacs of directors remuneration to the eligible unit, considering the directors' efforts in setting up the new unit.

Conclusion:
The Tribunal upheld the apportionment of auditors remuneration of ?59,800 to the eligible unit. For directors remuneration, it upheld the apportionment of ?3 lacs to the eligible unit. Consequently, the disallowance of deduction claimed under section 80IC was upheld to the extent of ?3,59,800. The assessee's appeal was partly allowed.